Peter Gulia

No comment on the story. For a much different plan sponsor, and one that thinks through implications of reporting and disclosure: Consider creating two plans. One plan covers employees. The other plan covers only self-employed individuals—for example, a partnership’s partners. If the plan for self-employed individuals never covers an employee, the plan is not ERISA-governed. Employees would get disclosures only for their ERISA-governed plan. This is not advice to anyone.

We recognize one might design a plan that does not provide pension-like deferred compensation or retirement income. Or, a compensation arrangement that is not even a plan. But is it feasible to do either for what Internal Revenue Code § 457(b) calls an eligible deferred compensation plan? A plan that, except for an unforeseeable emergency, allows no distribution until age 70½ or severance-from-employment? My explanation above about a § 457(b)(6) tax-law need to fit ERISA § 401(a)(1)’s select-group exception is limited to a nongovernmental (and not church) § 457(b) plan. Further, I was mindful that an arrangement not designed for a group or class and rather individually negotiated with one particular employee might not be an “employee benefit plan” within ERISA § 3(1)-(3)’s meaning. But I imagined that a tax-exempt organization with only one employee (the OP’s hypo) might lack resources to pursue or defend that idea as a reason ERISA’s title I does not govern the arrangement.

If a plan is ERISA-governed, part 4 of subtitle B of title I of ERISA would require an exclusive-purpose trust unless the plan is “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees[.]” ERISA § 401(a)(1), 29 U.S.C. § 1101(a)(1) https://www.govinfo.gov/content/pkg/USCODE-2024-title29/html/USCODE-2024-title29-chap18-subchapI-subtitleB-part4-sec1101.htm. But if an ERISA-governed plan does not that ERISA § 401(a)(1) select-group exception and so is funded with an exclusive-purpose trust, the plan would not meet Internal Revenue Code § 457(b)(6)’s tax-treatment condition that a nongovernmental organization’s plan must be unfunded. I.R.C. (26 U.S.C.) § 457(b)(6) https://www.govinfo.gov/content/pkg/USCODE-2024-title26/html/USCODE-2024-title26-subtitleA-chap1-subchapE-partII-subpartB-sec457.htm. If a tax-exempt organization’s plan is neither a governmental plan nor a church plan, a plan get a § 457(b) tax treatment only if the plan is unfunded and fits ERISA § 401(a)(1)’s select-group exception.

Among many ambiguities: Is the worker is a management employee. Is the worker “highly compensated”? Might an ostensible income deferral be unreal because the organization and its employee did not truly agree that the deferred compensation is unfunded? Which person bears which risks? This is not advice to anyone.

The more careful private-equity shops consider what you mention, and more. Some use lawyering to evaluate risk exposures. Most use lawyering to design investment structures that lessen risks of a finding that investing is a trade or business. Beyond the cases about withdrawal liability to a multiemployer pension plan, maybe not much has seen full litigation. Among other reasons, the Internal Revenue Service might not detect, and might not pursue, potentially taxable situations as vigorously as some multiemployer pension plans pursue withdrawal liability. Or, maybe the facts often show that investing is not a trade or business. This is not advice to anyone.

Beyond other aspects, this might be an occasion for RTFDs—all of them. Consider (at least) each plan’s plan documents; each plan’s trust documents; the employer’s participation agreement for each employee-benefit plan; each relevant collective-bargaining agreement, and each project-labor agreement; and anything else that touches either employee benefits or labor relations. ERISA § 3(6)’s definition for an employee is “any individual employed by an employer.” That definition does not by itself exclude a worker because the employer’s employment of the worker is (or was) unlawful. Before beginning your work, consider carefully exactly who is and who isn’t your client. That can affect how you approach the situation. This is not advice to anyone.

QDROphile, your teaching in BenefitsLink is most generous. And your one-sentence explanation (two with your nice illustration) of why, understandably, you’re not writing a response on my question just told me what I was seeking.

EBP, thank you; I had not even imagined a possibility of an involuntary distribution at the employer’s discretion. While the IRS-preapproved documents are obtuse, the fair reading of them is that the small-balance involuntary distribution is not at the employer’s discretion. That’s fine, because I wouldn’t advise a plan sponsor to set a plan provision that allows discretion about whether a participant is or isn’t burdened by an involuntary distribution.

HRagain, thank you. Anyone with a different view? Or with information that might make an employer more comfortable?

Paul I, thank you for adding your voice. About the idea of informing the domestic-relations lawyers that the plan's administrator does not consider, and does not read, documents beyond the court order itself, what do you think--wise, or unwise?

A nongovernmental, nonchurch higher-education employer established, and maintains, a § 403(b) plan. The plan always has provided nonelective contributions. In the beginning, the only vendor was TIAA-CREF. Later, the plan allowed Fidelity and Vanguard. More recently, the employer discontinued contributions to anything beyond TIAA-CREF. But participants with a Fidelity or Vanguard contract may keep it. The plan administrator’s Form 5500 report and audited financial statements for every year have consistently included the Fidelity and Vanguard amounts in reported-on plan assets. For a plan restatement this year, someone instructed a plan-documents technician, who is not associated with me, to add a mainstream small-balance cash-out provision. The employer/administrator has only a fraction of one employee looking in on all employee benefits, with little attention on the retirement plan. Unless they can rely on TIAA, they’ll be unable to administer the cash-out provision. Whatever service TIAA might offer to help implement a cash-out provision, I worry that TIAA would apply it looking only to TIAA-CREF’s records, without records of account balances at Fidelity or Vanguard. If it matters, the plan now is on TIAA’s RetirePlus Pro service. Am I right to worry? If my hunch is right, following TIAA’s cues on who gets a cash-out would result in some involuntary distributions contrary to the documents governing the plan and contrary to ERISA. Although my scope excludes plan design, I feel I should warn my client that it’s unwise to adopt an optional plan provision if the employer/administrator is not confident about its ability to administer the provision. Am I on the right track? Or is there some bit of legal or practical knowledge I’m missing?

BenefitsLink neighbors, what do you think about this: I have sometimes considered whether a plan administrator’s domestic-relations-order procedure might include these points: If a submission includes any document beyond the court order someone asks the administrator to recognize as a QDRO, return those documents to the submitter. Do that with a letter to both litigants and each’s representative (if any) stating that the other documents were not read, and are ignored. If the court order someone asks the administrator to recognize as a QDRO “incorporates by reference” a divorce decree, settlement agreement, or other document, state the administrator’s finding that the order is not a QDRO because the order does not “clearly specify” its instruction to the plan’s administrator. Is this a good idea, or a bad idea? Why? What are the potential disadvantages?

If you’re asking about a 404a-5 disclosure (and someone assumes the plan’s administrator chose to follow that interpretation): Even when a plan has no designated investment alternative, the administrator might have plan-related information to disclose (if not sufficiently explained in the summary plan description). See 29 C.F.R. § 2550.404a-5(c)(1)(i)(A)-(B)-(F), -5(c)(2)-(4) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(c). Or, if the truth is that the plan’s administrator never delivered a 404a-5 disclosure, the administrator might tell the new platform that truth. A service change might be an opportunity for a plan’s administrator to begin a disclosure. This is not advice to anyone.

Apart from other observations one might consider: If the plan is ERISA-governed, the plan’s administrator (or its service provider, if it speaks for the administrator) might inform the inquiring domestic-relations lawyer: A State-law construction aid that the absence of an expression means a measure includes gains and losses is useless for an order one wants treated as QDRO. ERISA alone governs how an ERISA-governed plan reacts to a State court’s order. An order that does not “clearly specify” its instruction cannot be a QDRO. This is not advice to anyone.

If the might-be plan sponsor would consider, seriously, correcting document and other defects: Engaging an admitted lawyer (or a Federally authorized tax practitioner) could set up an evidence-law privilege for confidential communications made to seek the lawyer’s or other practitioner’s legal advice. That might help set up a more comfortable environment for discovering what happened and discerning choices about whether and how to correct defects. Adding that bit of information to a call-your-lawyer suggestion might be a nice courtesy, even if the approached service provider is completely unwilling to accept the prospective client.